March 30 Prospects for the U.S. economy have
brightened now that stimulus from Washington appears more
likely, so the Federal Reserve will need to keep raising rates
and eventually trim its bond portfolio to avoid an overheating,
one of the most influential Fed policymakers said on Thursday.
The comments from New York Fed President William Dudley,
while sounding some notes of caution, were perhaps his most
optimistic in years and reinforced the notion that the core U.S.
central bankers are confidently on the road to tighter monetary
policy after having hiked interest rates twice in three months.
Dudley said recent inflation readings had made him more
confident that prices, which have been below-target since the
recession, will stabilize up around 2 percent. He also cited
"significantly lower" risks to overseas economies, good U.S.
jobs growth, and promises of tax cuts, spending and deregulation
from the Trump administration for the improving picture.
"While there is still considerable uncertainty about fiscal
policy ... it seems likely that it will shift over time to a
more stimulative setting," he said at the University of South
Florida Sarasota-Manatee. "Consequently it appears that the
risks for both economic growth and inflation over the medium to
longer term may be shifting gradually to the upside."
He added: "It seems appropriate to scale back monetary
policy accommodation gradually in order to reduce the risk of
the economy overheating, and to avoid a significant inflation
overshoot in the medium term."
Dudley, a close ally of Fed Chair Janet Yellen and a
permanent voter on policy, had a big hand in setting the stage
for the mid-March hike, which brought the key policy rate to a
range of 0.75 to 1 percent. Fed forecasts suggest two more hikes
are expected this year.
An easing of financial conditions since the November
election of President Donald Trump - rising stocks, narrowing
credit spreads, and falling bond yields - helped prompt the
decision, Dudley said. He also repeated an assertion from 2014 -
to some surprise at the time - that financial conditions play a
direct role in Fed policy decisions because they influence the
Markets mostly reacted positively to the election on
expectations of fiscal stimulus, though Republican plans to
revamp health care regulations fell through last week, causing
stocks to fall.
Turning to the central bank's record $4.5 trillion balance
sheet of bonds, which it acquired in the wake of the financial
crisis, Dudley said he expects longer-term market yields to rise
when the Fed finally outlines a plan to reduce its holdings.
"Presumably, financial conditions would tighten by more if
we were to end reinvestments earlier and more abruptly," he
said. "This suggests a better course may be to taper
reinvestments gradually and predictably."
(Reporting by Jonathan Spicer; Additional reporting by Sam
Forgione; Editing by Chizu Nomiyama)